Does Mortgage Collateral Have to Be a House?

Hard money mortgages might not require your home as loan collateral.

Most homebuyers use mortgage loans to purchase their homes. A mortgage loan gives the lender an interest in the property its borrower is purchasing with that loan. Mortgage lenders also don't give out loans just based on their borrowers' good names. Lenders require borrowers' collateral assets to secure the mortgage loans. Though the properties bought using mortgage loans traditionally serve as their collateral almost anything of worth can "collateralize" them.

Mortgage Loan Collateral

Mortgage lenders typically demand a security interest in the properties bought using their loans. To obtain a mortgage loan, you usually must pledge the property you're buying with that loan as security to back it up. If you default on your mortgage, the lender has a right to take the property backing it to help satisfy your debt. There are lenders, though, offering various types of collateral-based mortgage loans for borrowers hoping not to pledge their homes as security.

Collateral-Based Loans

Mortgage loans are possible based just on the potential collateral assets that hopeful homebuyers are willing to pledge to obtain their loans. Generally, any sort of mortgage loan for a home or other property not secured by that property will come from a "hard money" lender. Hard money lenders specialize in taking in just about any asset as collateral to secure the loans they make. "Cross-collateral" for hard money mortgage loans usually consists of borrowers' other properties but may include other assets.

Down Payment Requirements

Hard money mortgage loans normally come with higher interest rates and down payment requirements. Some hard money lenders may require down payments of 30 to 40 percent or more, plus the pledge of collateral. However, if your collateral is equal in value to the home you want to purchase with a hard money mortgage loan it may suffice. Hard money mortgage lenders generally accept borrowers no matter their credit rating if their collateral and down payments are sufficient.

Pledged-Asset Mortgages

Traditional mortgage lenders also offer pledged-asset or asset-backed mortgage loans that allow borrowers to pledge financial assets as down payments. In other words, you may be able to pledge stocks, your mutual fund or your savings account in lieu of a down payment for a mortgage loan. In pledged-asset mortgage loans, borrowers keep control of the assets they've pledged for their loans, including any interest earned on them. However, if you default on your pledged-asset mortgage you'll forfeit the asset pledged plus the property.

About the Author

Tony Guerra served more than 20 years in the U.S. Navy. He also spent seven years as an airline operations manager. Guerra is a former realtor, real-estate salesperson, associate broker and real-estate education instructor. He holds a master's degree in management and a bachelor's degree in interdisciplinary studies.